Chapter 1: Ten Principles of Economics- Principle 6: Markets Are Usually a Good Way to Organize Econ
The sixth principle of economics, markets are usually a good way to organize economic activity, is a principle that has shown throughout history. In a market economy, there is no central planner, but there are millions of firms and households that make their own decisions. Firms are the ones who decide what to make and who they want to hire. Firms and households interact in the market place, where decisions made are based off prices and personal interest. While one may believe that since nobody is watching over the economy, the efficiency and equity may not be maximized, this is not the case, because the invisible hand directs economic activity. In short, the price determines how much buyers buy and how much sellers sell, making a good way to organize the economic activity. When a government interferes, they distort prices and as a result, affect the decisions of buyers and sellers. One main problem faced by central planners, or the government, is knowing how much to produce and being able to read the taste of consumers. Therefore, letting the invisible hand organize economic activity in a market economy is usually the best way. This principle can actually be seen in real life, specifically in the Soviet Union and Eastern Europe during late 20th century.
Basically, communism collapsed in the Soviet Union and in Eastern Europe. Communism makes it so government officials allocate the economy's resources and decide how much is produced and consumed. However, straying away from this government organized economy led to much more success for the Soviet Union and Eastern Europe, showing how this theory of markets being a good way to organize economic activity holds true when applied to a real world example.